The Pennsylvania Department of Revenue has made the following updates to the treatment of COVID-19 funding programs.
Treatment of Restaurant Revitalization Funding (RRF)
The monies for restaurant revitalization funding are treated as nontaxable and are considered deductible for federal taxes. Since there are no provisions for adjustment and PA taxable income starts with federal taxable income, the same will apply. Monies are nontaxable and expenses paid are deductible for Corporate Net Income Tax (CNIT) purposes.
For Personal Income Tax (PIT) purposes, monies appear to be a grant which means no interest is being charged on funds and if used for authorized expenses, they do not need to be repaid. These funds would be nontaxable for PIT purposes since grants generally are. Expenses paid with these monies would be prohibited if they are otherwise deductible.
Treatments of Items Related to Paycheck Protection Program (PPP) Loan Forgiveness and the Effect on PA Accumulated Adjustments Account (AAA)
Recently, 1120s instructions for 2021 were finalized and include information on how to report the PPP loan forgiveness and expenses on schedule M2. PPP loan forgiveness and related expenses are reported in Other Adjustments Account (OAA), on the federal level. Established in Act 1 of 2021 PPP loan forgiveness is not taxable for Personal Income Tax (PIT) purposes. Any expenses paid with proceeds of a PPP loan cannot be disallowed unless they are deductible for PIT purposes. Forgiveness of PPP loans and associated expenses should not be reported in the PA AAA. These items would not be reported in Section VII of the PA-20S/PA-65, since the only accounts on the form are PA AAA and PA Accumulated Earnings and Profits (AE&P).
State and County Coronavirus Aid, Relief, and Economic Security (CARES) Act Grants
For Corporate Net Income Tax (CNIT) purposes, the CARES Act grants would follow the taxability for federal purposes since PA taxable income starts with federal taxable income. It is tough to give absolutes regarding taxability of items for Personal Income Tax (PIT) purposes. Although, grants are generally nontaxable.
Does Exempt Income Add to Basis of Partners in Pass-Through Entities?
Pennsylvania follows the federal rules when it comes to outside basis. This means that any “income” will increase outside basis when it comes into a pass-through entity. The Federal Reserve System considers every extension of wealth to be “income,” but Pennsylvania does not follow this same rule. Income only includes the eight classes of income though, there would be an increase in outside basis even for nontaxable income like PPP loans, HHS Provider Relief loans, Targeted loans that would be considered grant rather than loans.
Tax Treatment of the Employee Retention Credit (ERC)
The PA Department of Revenue updated the guidance on the Employee Retention Credit due to questions and concerns that were raised. The refundable tax credit is 50% of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by COVID-19, according to the IRS.
Calculation of taxable income begins with federal taxable income for Corporate Net Income Tax (CNIT) purposes. There is no adjustment for Pennsylvania CNIT purposes because there is no provision in the state’s statute allowing the deduction of the disallowed federal wage expense.
Any reduction to the wage expense for federal tax purposes that is a result of a credit against taxes withheld from the employee, would be deductible for Pennsylvania Personal Income Tax (PIT) purposes. If the wage expense is a result of credit against the employer’s own FICA liability, then it would not be deductible for PIT purposes.
If you have any questions on the treatment of COVID-19 funding programs, contact your BSSF advisor.
About the Author
Randy Fackler is a Principal and the Tax Director at Brown Schultz Sheridan & Fritz and is one of the key members of the Firm’s Tax Department. He is responsible for managing tax consulting and compliance services for his clients as well as overseeing the tax department.